The answer to that question matters, because capturing the value of highly-volatile cryptocurrency often determines winners and losers in bankruptcy cases where cryptocurrency is a significant asset. The recently-publicized revelation that the bankruptcy trustee of failed bitcoin exchange Mt. Gox is holding more than $1.9 billion worth of previously lost or stolen bitcoins highlights the issue.

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February 2, 2017

While significant energy here at the Bankruptcy Cave is devoted to substantive bankruptcy matters, not all aspects of a general insolvency practice are always fun and litigation. Oftentimes insolvency lawyers add the most value by helping clients avoid a bankruptcy filing, or by successfully resolving a case through a consensual transactional restructuring. Below are a few key issues diligent counsel for creditors and debtors should think through in connection with a transactional restructuring.[1]

1. Notice and Demand After Default. As anyone reading this knows, a lender often sends a notice of default and maybe even a demand for payment after its borrower defaults. However, simply sending a notice of default and demand for payment may not always be sufficient or have the intended effect. Most loan documents provide a cure period before a breach becomes an actionable default. Some loan documents will only permit a lender to accrue

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July 25, 2016

Individual debtors with old tax debts relating to late-filed tax returns may be surprised to find that those tax debts may not be dischargeable under section 523(a) of the Bankruptcy Code due to the lateness of the tax filing. There is a current Circuit split regarding whether a late tax filing constitutes a “return” at all, which is critical to the dischargeability inquiry. The Ninth Circuit weighed in last week in In re Smith, 2016 WL 3749156 (9th Cir. July 13, 2016), further cementing the split. Individuals considering whether to file bankruptcy to obtain a discharge of old tax debts would be well-advised to assess the current legal landscape and plan accordingly.

Section 523(a)(1)(B)(i) Exemption From Discharge For Tax Debts

Section 523(a)(1)(B)(i) of the Bankruptcy Code exempts from discharge any debt

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June 27, 2016

What a difference a week makes! On June 17, 2016, bitcoin was trading at more than $750. Five days later, as polls showed the Brexit vote leaning heavily to “remain,” bitcoin dropped as low as $585. After the vote to leave the European Union became final, the British Pound, the Euro, the Chinese Yuan, and global stocks dropped precipitously. Bitcoin, on the other hand, spiked to more than $676, and was trading in the $660s on Friday. Could this mean bitcoin is being perceived as a new safe-haven asset?

A Brief Background on Bitcoin Generally

Bitcoin often is described as a “digital currency.” On a more technical level, bitcoin is a digital asset within a peer-to-peer computer network payment system created in 2008

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November 9, 2015

A recent Second Circuit Court of Appeals decision, Franklin v. McHugh, 2015 WL 6602023 (2d Cir. 2015), illustrates the dire consequences of failing to comply fully with all electronic filing requirements for a notice of appeal. Although appellant’s counsel in that case attempted to file a timely notice of appeal, properly initiated the electronic filing process, paid the filing fee, and received payment confirmation, the Second Circuit dismissed the appeal for lack of appellate jurisdiction due to the technical failure of appellant’s counsel to “click all the buttons” required to complete the filing. In jurisdictions that require electronic filing, counsel must be mindful not only of the applicable procedural rules but also of the electronic filing requirements.

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December 23, 2014

In a seminal pair of decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the United States Supreme Court clarified that the pleading standard under Federal Rule of Civil Procedure 8(a) requires that a complaint contain sufficient factual allegations to state a claim to relief “that is plausible on its face.” Neither Twombly nor Iqbal addressed, however, whether this “plausibility” standard also applies to denials under Federal Rule of Civil Procedure 8(b). In its recent decision in In re Mortgages Ltd., 771 F.3d 623 (9th Cir. 2014), the Ninth Circuit Court of Appeals weighed in and held that the “plausibility” standard does not apply to denials.

The debtor in this case, Mortgages Ltd., was a private lender that made loans secured by real estate located in Arizona. Mortgages Ltd. funded its lending operations, in part, by selling fractional interests in its

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In a seminal pair of decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the United States Supreme Court clarified that the pleading standard under Federal Rule of Civil Procedure 8(a) requires that a complaint contain sufficient factual allegations to state a claim to relief “that is plausible on its face.” Neither Twombly nor Iqbal addressed, however, whether this “plausibility” standard also applies to denials under Federal Rule of Civil Procedure 8(b). In its recent decision in In re Mortgages Ltd., 771 F.3d 623 (9th Cir. 2014), the Ninth Circuit Court of Appeals weighed in and held that the “plausibility” standard does not apply to denials.

The debtor in this case, Mortgages Ltd., was a private lender that made loans secured by real estate located in Arizona. Mortgages Ltd. funded its lending operations, in part, by selling fractional interests in its loans to investors. Under this arrangement, the investors owned their fractional interests in the Mortgages Ltd. loans in which they invested.

After Mortgages Ltd.’s bankruptcy filing, the Bankruptcy Court confirmed a plan that created an entity known as ML Manager LLC to manage and liquidate Mortgages Ltd.’s loan portfolio. Issues arose regarding ML Manager LLC’s authority to manage and liquidate the fractional interests in the Mortgages Ltd. loans owned by various investors, including a group of investors known as the Rev Op Group.

ML Manager LLC eventually filed a complaint seeking a declaratory judgment from the Bankruptcy Court on the issue of its authority to control and sell investors’ loan assets. ML Manager LLC asserted in its complaint that the Rev Op Group and other investors executed certain documents that granted Mortgages Ltd. an irrevocable agency power to manage and liquidate their loan assets, that the agency power was transferred to ML Manager LLC by the confirmed plan, and that ML Manager LLC therefore had authority to control and liquidate the Rev Op Group members’ assets over their objections. In their answers, the Rev Op Group members admitted signing certain documents in connection with their investments, but denied executing documents that granted any agency authority with respect to their loan assets.

In a novel ruling, the Bankruptcy Court held that the Twombly / Iqbal “plausibility” standard applied to the Rev Op Group’s denials and that, based solely on the pleadings, the Rev Op Group’s denials regarding the alleged agency authority were not plausible. Accordingly, the Bankruptcy Court entered judgment in favor of ML Manager LLC on the agency authority issue.

On appeal, the Ninth Circuit held that the “plausibility” standard does not apply to denials and reversed the Bankruptcy Court’s declaratory judgment. In doing so, the Ninth Circuit reasoned that a court may only disregard statements in a pleading under Rule 11 (for bad faith) or under Rule 12(f) (for matters that are scandalous, immaterial, impertinent, etc.), and that the Bankruptcy Court had not tested the Rev Op Group’s denials under either of those standards. “Courts cannot examine statements in an answer or other pleading and decide, on the basis of their own intuition, that the statements are implausible or a sham and thus can be disregarded.” Accordingly, the Bankruptcy Court erred by “effectively resolv[ing] those allegations” in the Rev Op Group’s denials “on the merits.”

With this decision, the Ninth Circuit has now clarified that Rule 8(b) does not require defendants to plead denials under a heightened “plausibility” standard in federal court. This decision is also notable for providing further clarification on other bankruptcy-related issues, including equitable mootness and substantial consummation of a bankruptcy plan.

In the interest of full disclosure, Bryan Cave LLP represented the appellants—the Rev Op Group—in the bankruptcy case and appeal discussed herein.

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